Setting a price for your products isn't a simple process. Any given product can sell at a range of different prices, depending on what you want to spend on marketing, and how many units you want to sell. Penetration pricing strategies choose a low cost to increase customer demand and, hopefully, give you the opportunity to raise prices in the future. Using this model carries some legal and ethical concerns.

Understanding Penetration Pricing

When a company uses a penetration pricing strategy, it's usually because it wants to quickly gain market share or wants to lock out coming competitors. With penetration pricing, the company sets the price to a low enough level to quickly increase sales and get customers "hooked" on the product. As sales grow, the company lowers its cost of production through greater efficiency and economies of scale. At the same time, if competitors leave the market, the company can then raise prices to take advantages of the established consumer demand.

Predatory Pricing

Penetration pricing is a tough business strategy. Done right, it'll hurt your competitors and set your customers up to have to pay more in the future. It's theoretically possible that it could cross the line into being predatory, though. If your company is clearly pricing below cost for a long time for the sole purpose of destroying its competitors, you could end up having to deal with the Federal Trade Commission.

Creating a Monopoly

The logical extreme of a predatory penetration pricing strategy is a monopoly. Once you've knocked your competitors out of the market, you could end up as the only company offering a particular product or service. Under the Sherman Anti-Trust Act, being a monopolist is illegal if that status has been achieved by using anti-competitive conduct to suppress competition and the government could break you up, fine you, or regulate how you do business.

Dumping

For businesses that export, dumping can be a form of predatory pricing. It occurs when a business sells a product at a lower price in a foreign market than it does at home. Some countries have anti-dumping laws that impose tariffs or other penalties on products that are sold at artificially low export prices. While it's unlikely that a single small business would trigger scrutiny, you could get caught up if your industry is generally involved in selling products at prices that can be proven to be below their domestic market levels.

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.